A blog of the NYU Colloquium on Market Institutions and the Leipzig Colloquium on the Market Order

Water does not run uphill

The Los Angeles Times reports, “Industry is warming up to Obama’s climate plan.” It seems many big businesses, including Alcoa, want to go green. To what do we owe this sudden tree-hugging zeal? It could be an altruistic desire to save the planet, but I have a more skeptical opinion. I think they see it as a way to keep the competition at bay. “Cap and trade” is essential to the Obama plan. If emission permits cost $20 per ton (per year, presumably), “then cap and trade might add $460 million a year to Alcoa’s annual operating costs.” That sounds pretty painful for Alcoa stockholders. But Alcoa is pushing for a plan in which the government gives, “companies like Alcoa nearly enough free permits in the early years of cap and trade to cover emissions.” In fact, there seems to be some expectation that Alcoa may get so many permits that it would have surplus permits to sell. What looks like a self-sacrificing corporation rising above itself to act in the social benefit turns out to be ordinary rent seeking.

And Alcoa is not the only established business in a position to enjoy such largess. “The White House has signaled a willingness to provide financial offsets and other relief to the states and companies that would be hit hardest by new cap and trade rules.” Existing firms are subsidized and startups are taxed simultaneously. Welcome to the brave new world tiresome old world of “partnership” between business and government.

As a general proposition, cap and trade is a good idea. We should cut down on pollutants, including greenhouse gases, and we should leverage market forces to do so. Nothing in such principles puts an end to rent seeking, however — or causes water to run uphill.

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23 thoughts on “Water does not run uphill”

I believe that the whole government meddling in creating a so called green energy industry is very mistaken. But there seems no way to stop the impetuous right now. Not only that the Obama administration endorsement of such policies has brought a new prestige, but all the money that the World Bank, the regional development banks, BERD and so on plan to spend in order to effect the global stimulus decided at the London G20 summit is now linked investments that in one way or another are “green”. The “Global Deal” proposed by Gordon Brown is a “Green Global Deal”. The government money channeled at the national, regional, or even international level for saving banks threatened by insolvency are also conditioned by financing “green projects”. I’ve just read several reports coming out from big European banks stating that green investments are the only ones they will consider financing in this period. What a surprise?! But what will it happen when the money run out ? Western companies were flocking to Eastern Europe to build malls, offices and so on. Now, they’re flocking to build wind mills ! The British government mandated CO2 storage in march, although the technology is very costly and experimental. I’ve just come back from a presentation made by representatives of some companies involved in this business and sponsored by the British Government: I couldn’t believe that the title was “How to make money from green energy” and everybody believed it.

It is also ironic that you name the title of your article “Water does not run uphill” because water vapor is also a greenhouse gas and I don’t suppose anyone would believe an absurd declaration that water vapor is also a pollutant. Water and CO2 are both necessary for life on this planet.

Economists seem so wrapped up in the economics of taxation and externalities that the underlying reason behind the tax is not examined very closely. Hence, statement like this, “As a general proposition, cap and trade is a good idea.”

Why cap and trade is a good idea given all the rent seeking spelled out in your article is a mystery? It would seem that cap and trade is a bad idea even if you believe that CO2 is a pollutant.

This is how Alex Tabarrok and Tyler Cowen put it in their new textbook:

“…firms that are given allowances in the initial allocation get a big benefit compared to having to pay taxes…To make progress against global warming, may require building a political coalition. A carbon tax pushes one very powerful and interested group, the large energy firms, into the opposition. If tradable allowances are instead given to firms initially, there is a better chance of bringing the large energy firms into the coalition.”

I would agree with what your links say regarding the politics of cap and trade. Cap and trade is more appealing to sell to the public than a carbon tax. Who likes taxes? Cap and trade, although having very much the same effect as a carbon tax with the added bonus of rent seeking included, is sold to the public as merely a “regulation” to “help” the environment. Also, with cap and trade the tax is hidden and not explicit like with the carbon tax. Politicians love hidden taxes.

I am assuming that the best currently available opinion points to global warming caused by human action. I fully acknowledge the possibility that global warming is not caused by people or not even happening at all. I think science is subject to silly fads, though perhaps less so than other areas of human endeavor. Thus, global warming might be a fad. Absolutely. OTOH, science is still our only reasonable source of knowledge about the physical world and we’ve got to go with what we’ve got. The memo you cite seems to be authored by one or more attorneys, not scientists. I scanned it and couldn’t help wondering if the author(s) might be a left-over Bush appointee. Anyway, those nine pages do not cast out the currently dominant scientific opinion.

You ask how I could still like cap-and-trade after pointing out the rent seeking involved. As a matter of strict logic, the fact of rent seeking does not imply that the policy sought is bad. Often it is better to do nothing rather than something, but not always. As far as I can tell, actually existing cap-and-trade beats doing nothing.

I am amazed that dismiss the OMB memo as a purely political memo by Bush lawyers (you could have said Bush-Cheney lawyers to make it really bad), implying of course that the EPA classification of CO2 as a pollutant was not political but a scientific decision. The push to make CO2 a pollutant is a political decision.

From the economist, “the Supreme Court ruled that it should regulate greenhouse gases if they were found to be toxic. As expected, the EPA, now run by Lisa Jackson, who brings to the job 20 years of experience as a regulator who’s tough on business, gave a provisional ruling that they were….“

However, the term “toxic”, according to the Merriam-Webster dictionary, has three uses
1. containing or being poisonous material especially when capable of causing death or serious debilitation with the examples “toxic waste”; “toxic radioactive gas”; “an insecticide highly toxic to birds”.
2. exhibiting symptoms of infection or toxicosis with the example “the patient became toxic two days later”.
3. extremely harsh, malicious, or harmful with the example “toxic sarcasm”

At the levels of CO2 in the atmosphere, CO2 does not fit any of these definitions. The Economist (and if they accurately reported) the EPA postion misrepresent the actual effect of CO2 in the atmosphere. It is a climate forcing NOT a toxic air pollutant.

As a resident of NJ, I witnessed firsthand Ms. Jackson’s bully tactics when she stopped the Bear hunt and ignored scientific findings and Court order to reinstate the hunt. She only follows science when it fits her agenda and is willing to defy the law to do so. Sounds like a perfect idiot in Obama’s “1984” like thought police!

I completely agree that the political decisions on each side of the issue are, well, political. But that’s a wash, isn’t it? When a word such as “toxic” moves from the scientific journals to the law court, the, um, sophistry gets pretty thick. Yes. Having said all that, we’re left to decide whether the chance of human influenced global warming is big enough to justify an imperfect bargain to reduce greenhouse gases. I’m among those who think the stakes are lower than many alarmists claim, including Al Gore. Nevertheless, I think would be better to cut down on greenhouses gases as long as the measured used to do so are not too radical.

A majority of the mainstream economics profession has discredited itself by its support for scientifically and economically unjustified cap-and-trade or carbon tax schemes. The science behind claims of anthropogenic-driven climate warming is as dubious as the now-discredited Limits to Growth, Club of Rome reports of several decades earlier. Even if Kyoto or its successor proposals were adopted by the U.S. and other holdouts, the effect on global temperatures would be minimal — as is even conceded by proponents. Meanwhile, however, the effects on global standards of living would be devastating. Equally importantly, this is a statist-promoted scheme to centralize control over free markets through U.N., European Union, and similiar international bureaucracies. I think it’s a scandal that a contributor to an Austrian economic blog hasn’t seen through this economic and political fraud.

Well, hey its not the rent seeking that’s the problem, it’s the rent getting.

The only reason I can see to support either cap and trade or a carbon tax is to reduce the consumption of oil, hopefully reduce the pre tax price and remove some revenue from the Middle East. Of course, that isn’t any likelier than cap and trade reducing CO2 emissions or reducing the temperature of the planet. Other than that it’s all just another scheme to protect established big businesses, fund political campaigns and concentrate more power in DC.

The biggest danger in enacting cap and trade or a carbon tax is that the planet cools naturally and the politicians who put this in place take credit for something that would have happened anyway. That will just reinforce the cult of government that seems to be developing. Big government will be validated. I would oppose it for that reason alone.

Thanks for that link, Richard. I like Lomborg. He cites the IPCC, which says climate change is real and probably mostly “anthropogenic.” Lomborg’s himself affirms the same thing in other places. And I agree with Lomborg that corporate buy-in to measures such as cap-and-trade is a mostly a matter of rent seeking. Indeed, that’s what my post was saying in the first place.

All the above notwithstanding, you say, ever so diplomatically, “I don’t think you’d notice a black helicopter if it landed on your head.” What madness do I spout to merit such a cut? Apparently, the offense comes either from my comment that cap-and-trade is a good idea “as a general proposition.” Or perhaps it was my admittedly more fallible judgment that “As far as I can tell, actually existing cap-and-trade beats doing nothing.” I must confess, I don’t know how to avoid the conclusion that your comments are, well, disproportionate to the cause. On the one hand you call global warming a “fraud” and say that economists who don’t see that have “discredited” themselves. On the other hand you cite an economist who specifically affirms the reality and human source of global warming. Hm . . . I’m not sure I see how that’s consistent.

They think the dubious science, bad cost-benefit economics, and statist politics behind “global warming” recommend one policy only: foster objective climate research, as opposed to the politicized research that is mostly being done today.

– a second school, that accepts the IPCC scientific findings (though not necessarily the politically-oriented executive summaries written by U.N. non-scientists) but regards the proposed remediation measures such as Kyoto as being expensive, nearly useless in their effect, and failing to meet minimal strictures of cost-benefit analysis; Lomborg is a member of this school; he is an ally of the first school in all but his lack of skepticism about the IPCC climate modelers’ predictions, which the first school regards as no more reliable than the earlier Malthusian and statist Meadows-Forrester, Limits to Growth, Club of Rome reports;

– a third school, which believes that what Al Gore and the IPCC say is good science, that something very expensive urgently needs to be done, even if the effect on climate is minimal and the effects on economic growth and standards of living are debilitating. Along with the usual Democrats, Republicans such as Greg Mankiw and his Pigou Club and at least one Austrian (yourself) have enrolled in this school, alas. The science, the politics, and especially the economics (your specialty) should situate you elsewhere and hopefully will sooner rather than later.

You’ve got to be kidding, Richard. I’m not allowed to have my own opinion, apparently, and must fit into one of three pre-fab boxes you define for me. Our readers can decide for themselves whether I have taken the view (unreasonable by definition) you attribute to me and to the rest of the “third school” you identify.

I would invite readers to check out the posts at MasterResource on the science, economics, and public policy of CO2 regulation. Robert Murphy has done a lot of digging into cost/benefit, in particular.

I’m pretty sure “ieradmin” is the wonderful Robert Bradley who always says reasonable things and backs them up with facts and solid analysis. I hope Rob will forgive me for favoring a more aggressive policy on global warming than he thinks best. I appreciate the link to his masterresource blog and would also point to his institute:http://www.instituteforenergyresearch.org/

As for my position, Richard, I think the basics have been said already. BTW, you might take a few pointers from Rob Bradley on how to argue your POV without departing from the path of reasoned discourse.

[…] would companies be eager to support something that would be a cost on them? Because it would be an even bigger cost on their competition: I think they see it as a way to keep the competition at bay. “Cap and trade” is essential […]

[…] treaty proponents.” This support is old news as I noted last May in a post entitled “Water does not run uphill.” The L A Times report nevertheless express surprise saying, “an unlikely batch of […]

I agree that cap and trade is a good idea. Now is the best time for businesses to promote themselves as environmently friendly than ever. Whether businesses are correcting their polluting ways for profit and earning customer loyalty or doing their part to sustain the environment, there is never a better time to be more aware of our carbon foot prints.